CHAPTER 16 PAYING WELL DETERMINATIONS—TECHNICAL
| Jurisdiction | United States |
(Jan 1997)
PAYING WELL DETERMINATIONS—TECHNICAL
Bureau of Land Management
Cheyenne, Wyoming
J. David Chase
Bureau of Land Management
Casper, Wyoming
TABLE OF CONTENTS
Page
INTRODUCTION
I. THE DISCOUNTED CASH FLOW ANALYSIS
A. Drilling, Completion and Facility Costs
B. Projected Rate of Production
C. Value of Production
D. Operating Costs, Taxes and Royalty Payments
E. The Discount Factor
II. COMMENCEMENT TIME FOR THE DCF ANALYSIS
III. WHAT IS A PAYING WELL
IV. PAYING WELL DETERMINATIONS FOR RECOMPLETED OR REENTERED WELLS
V. THE REEVALUATION OF PREVIOUS DETERMINATIONS
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INTRODUCTION
Section 9 of the model form unit agreement defines a paying unit well as one that is capable of producing unitized hydrocarbons in quantities sufficient to repay the costs of drilling, completing and producing operations with a reasonable profit.1 The Bureau of Land Management (BLM) has developed a procedure to perform an economic analysis of wells completed under the terms of the unit agreement to determine whether the well is capable of production in paying quantities (under the unit definition). A well must be paying in "unit quantities" to cause the establishment or revision of a participating area.
I. THE DISCOUNTED CASH FLOW ANALYSIS
The BLM uses a discounted cash flow (DCF) economic analysis to determine the paying status of a unit well. The BLM uses Munro Garrett International's ARIES (Advanced Reserve Information and Evaluation Software) package to perform their DCF analyses. The annual cash flow is estimated over the projected productive life of the well. A discount factor is applied to the annual cash flow to convert the future dollars into present dollars. If this stream of present dollars offsets the drilling, completing, and producing costs, the well is considered a unit paying well. There is no set limit to the number of years to achieve a positive cash flow or payout.
The components of a DCF analysis for a paying well determination are:
1. The cost of drilling, completing, and producing;
2. The projected production rate;
3. The value of the production;
4. The operating costs, taxes and royalty payments; and
5. The discount factor.
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A. DRILLING, COMPLETING AND PRODUCING COSTS
Generally, the drilling, completion and producing costs considered in a paying well determination are the actual costs incurred. However, the BLM Manual/Handbook 3180-1 states that other reasonable costs which a prudent operator could be expected to incur should be considered. Extraordinary costs such as loss of well control, extensive coring and testing programs or an extended fishing job should not be considered.2
B. PROJECTED RATE OF PRODUCTION
The rate of production can be estimated using a variety of reservoir engineering techniques. The most common method of estimating the production rate is by use of decline curve analysis. Decline curves are generated by taking the initial production rate, assigning an exponential or hyperbolic decline rate projection based on observed decline rates for comparable wells or other knowledge of reservoir performance, and producing a curve which estimates the production rate at any time during the projected life of the well. Estimated recoverable reserves can also be derived from this curve.
In instances where the actual rate of production does not agree with the projected rate of production submitted by the unit operator, the BLM will require several months of actual production history before the paying well determination is made. Generally, at least six months, but no more than 12 months, of production history is required.
C. VALUE OF PRODUCTION
The prevailing market or contract price at the time of the paying well determination is used to value the oil and gas. Typically, in Wyoming, the gas price used in the economic analysis is the spot natural gas price posted by Northwest Pipeline for Opal, Wyoming. The gas price is adjusted for BTU value and for transportation and processing fees. Spot natural gas prices are found monthly in the Oil and Gas Journal (a PennWell Publication).
Typically, in Wyoming, the oil price used in the economic analysis is the crude oil prices reported by Marathon Oil Company. The oil price is adjusted for type of oil (sweet or sour) and for API gravity. Crude oil prices are found in Marathon Oil Company's monthly bulletin.
The BLM Manual/Handbook 3180-1 states that the product prices are usually held constant throughout the life of the well; however, price escalation factors are permitted. A reliable and readily
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available source for forecasting product prices is published by the Energy Information Administration (EIA) which is part of the U.S. Department of Energy. The EIA publishes periodic reports such as their Annual Energy Outlook and Short-Term Energy Outlook which contain this information.3
D. OPERATING COSTS, TAXES AND ROYALTY PAYMENTS
Operating costs are defined as the cost to produce the well and maintain the lease. These operating costs include the usual costs of marketing the products. The BLM Manual/Handbook 3180-1 states that extraordinary costs, such as the construction of a lengthy pipeline, are not included. Operating costs are usually held constant throughout the life of the well; however, cost escalation factors should be considered when product prices are escalated. A readily available source for forecasting future operating costs is published by the Bureau of Labor...
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